Probably the greatest studying experiences in my profession got here early once I spent 7 years at Bloomberg. It was a time of large growth for Bloomberg as they strove to catch after which move Reuters market share. Led by a visionary CEO and suffering from critical expertise throughout the corporate I used to be lucky sufficient to be workforce lead as we launched mounted revenue digital buying and selling on the Bloomberg terminal. For a few of this time the e-trading groups have been seated alongside the info gross sales groups, and it was my first expertise of the facility of knowledge and the income potential. This piece will take a more in-depth take a look at the digital FX (e-FX) knowledge area and the potential for the subsequent decade.
So typically in e-FX the story has been informed by the lens of buying and selling volumes, liquidity suppliers (LPs), and ultra-fast matching engines. What number of press releases from platforms appear to see Common Each day Quantity (ADV) because the bellwether to success? Nonetheless, in a world of unfold compression and LP stress on platforms to cut back prices there lies a quieter, much more worthwhile battleground.
Market knowledge
Whereas spreads in main FX pairs have diminished and commerce execution charges have turn into commoditised, market knowledge has turn into the asset class that provides e-FX venues most scope for contributing to EBITDA. It may very well be argued as one of many major causes main exchanges acquired FX platforms.
1. Why Market knowledge issues greater than execution
Not like equities or futures, FX is decentralised, which means there is no such thing as a single consolidated tape or official pricing supply. Each platform e.g. Bloomberg FXGO, LSEG FX All, Deutsche Boerse 360T, Cboe FX, FXConnect, FXSpotstream and SGX FX — contribute its personal “window” into the market attributable to their pricing methodology and their areas of power (Regional, Product or Shopper based mostly).
This creates monumental worth to knowledge shoppers as a result of:
- knowledge = transparency
- transparency = benchmarks
- benchmarks = buying and selling selections, threat, and valuation
Purchasers, which may very well be hedge funds, banks, OMS/EMS suppliers, exchanges, knowledge distributors, brokers…the record is lengthy, can pay a premium for the cleanest, deepest, and most consultant value streams. In lots of circumstances, the info product is price greater than the trades themselves to those shoppers.
2. The Market knowledge hierarchy: Why only some venues win
Not all FX knowledge is created equal. There are successfully three tiers of FX knowledge high quality:
Tier 1 — Major or quasi-primary venues (e.g. EBS, Reuters matching, Cboe FX, 360T GTX)
These have:
- agency, nameless liquidity
- giant, various shopper bases
- lengthy historic time sequence
- constant quote and commerce behaviour
Their knowledge is used for algorithm calibration, TCA, threat fashions, valuations, and analytics.
These venues dominate the premium-priced knowledge section.
Tier 2 — Specialist or relationship-driven venues (e.g. FXAll, SGX FX)
These platforms produce helpful knowledge for particular merchandise or pairs (often EM) or shopper segments, however not for all the market and most costs right here are usually not broad sufficient to be thought of a benchmark.
Helpful for:
- regional buying and selling desks
- EM pricing fashions
- bespoke algo execution
Tier 3 — Single Seller Platforms (SDP)
SDPs/ internalisers produce huge quantities of stream, however the knowledge hardly ever qualifies as impartial or consultant as a result of:
- it displays the LP’s personal skew
- it’s client-specific
- it doesn’t symbolize all the market
This knowledge is great for microstructure evaluation and for shopper TCA however has restricted exterior business worth. For this text I’m specializing in Tier 1 & 2 and leaving SDP knowledge out.
3. Why knowledge has turn into the true revenue engine
Anybody energetic within the e-FX area or monetary companies generally will probably be nicely conscious of the income alternatives within the knowledge area. At a current lunch with a Head of Enterprise Knowledge at one of many world’s largest multistrategy hedge funds I used to be knowledgeable that the e-FX area is comparatively naïve in comparison with different asset courses.
Many e-FX platforms nonetheless go away the info gross sales to the identical salespeople who’re promoting the buying and selling platform. I’ve seen this primary hand the place many salespeople both try to give the info away without cost with no understanding of the distinctive proposition or others would try and extrapolate ridiculous fees for knowledge out there in lots of locations for a fraction of the fee. I keep in mind saving one such deal over the telephone with a NY fund when a senior salesperson overpriced the info value by 400% to a world hedge fund.
Nonetheless, many e-FX platforms are nonetheless not seeing the true potential in knowledge gross sales and the very fact it wants an information gross sales specialist to promote the proposition. e-FX platforms can take some pointers from firms throughout a number of knowledge merchandise who do that nicely – CME in Q2 made almost $200 million in income from knowledge gross sales throughout their merchandise. Bloomberg don’t report figures however again in 2023 the FT reported an estimated $2BN a 12 months in knowledge income.
(A) Unfold compression has killed fee-based income
Why is knowledge now an necessary battleground? As LP competitors elevated, spreads on main pairs diminished and as such e-FX platforms who would usually cost spot $10-$20 per M in 2010 at the moment are across the $1-$5 per M cost….and it’s solely heading a method. Throughout this era the price of working a venue didn’t fall proportionally particularly if the platform wanted to get on board with regulatory pressures and set up regulated entities (particularly within the UK/EU). This pressured platforms to search for non-transactional, high-margin income — and knowledge was the apparent reply.
Market knowledge usually has:
- >75% gross margins
- subscription-style recurring income
- low operational value
This makes it probably the most fascinating and scalable income strains in all the FX stack and one with essentially the most potential. Even in the event you have been to strip down the info potential to at least one subset of shoppers (hedge funds) there may be most likely at the very least $4-5BN of knowledge gross sales out there globally with a good portion of that in FX. As one hedge fund mentioned to me ‘if it makes us cash, we are going to purchase it!’.
(B) Fuelling knowledge gross sales: Algorithms want knowledge — plenty of it
FX algos have turn into extra mainstream throughout the buy-side now. In my expertise operating gross sales/income technology at e-FX platforms the expansion of algos from financial institution internalisers. hedge funds, asset managers and extra not too long ago company treasurers has seen spectacular development and adoption.
Algos are data-hungry and require a minimal of 5 standards (under):
- historic tick knowledge
- venue-specific fill knowledge
- order e-book dynamics
- time-of-day seasonality
- volatility and liquidity heatmaps
e-FX venues realised this and anybody who has labored with an trade at a strategic stage is aware of this was one main purpose exchanges purchased FX platforms. It was a refined level that may very well be cross utilised within the trade group in addition to an space providing great potential.
(C) Regulation elevated the necessity for clear knowledge
Exchanges have been fast to grasp that regulatory stress that will transfer into the FX market would enhance the necessity for knowledge. Despite the fact that spot FX will not be a MiFID II instrument, a spread of regulatory and threat pressures have pushed corporations towards TCA, Greatest Execution insurance policies, Audit trails, Vol and mark to market validation and threat governance. High quality knowledge is crucial for all of those.
Exchanges recognised this early and constructed whole enterprise strains round FX knowledge licensing. As soon as an FX venue is inside an trade group, knowledge monetisation turns into dramatically extra environment friendly.
4. Exchanges apply a three-step technique to knowledge gross sales:
Step 1 — Bundle & rebrand the FX dataset
Flip uncooked tick knowledge into indices, consolidated feeds, analytic merchandise, real-time and historic bundles and threat/vol dashboards.
Step 2 — Cross-sell to current trade clients
Take into consideration an Exchanges shopper record. FX knowledge may be bought to equities shoppers, futures merchants, company customers, threat departments, index suppliers and clearing members
The distribution is already constructed — FX knowledge merely plugs into it.
Step 3 — Add FX knowledge into enterprise contracts
Massive banks and funds typically purchase all the info from an trade which creates high-margin, multi-year bundled agreements with FX being part of this.
5. The long run: The rise of FX “Knowledge Utilities”
e-FX platforms will see new monetisation channels past easy “knowledge gross sales.” Some potential tendencies or tales that may proceed to develop:
The consolidated tape by no means took off, and a few firms tried and did not get the market to purchase in to the story however there is no such thing as a doubt with so many venues and no official benchmark, regulators and enormous buy-side corporations might re-float this concept.
The large buzzword in all markets is AI. AI is data-hungry and LLMs, predictive fashions, and microstructure AI instruments will want clear tick knowledge and venue particular knowledge. The winners will probably be venues with deep, long-term historical past and versatile knowledge supply instruments.
Promoting bespoke market knowledge. Purchasers more and more need per-client TCA, customised liquidity heatmaps, venue-specific execution likelihood fashions and counterparty-specific skew behaviour
6. Knowledge distributors/Analytics suppliers and their position within the e-FX area
We haven’t even touched on devoted knowledge and analytic distributors and their affect on this area. Firms like BestX, Tradefeedr and New Change. Maybe only for now it’s price mentioning some e-FX platforms who’ve taken a strategic method to aligning themselves with specialist suppliers within the area akin to LSEG FXAll strategic alignments with Tradefeedr and FXConnect’s collaboration with Greatest X on BestXecutor (each State Avenue owned). Could also be this may must be a observe up piece.
Conclusion: Market knowledge is turning into one of many Crown Jewels of e-FX
Buying and selling venues are not simply matching engines. They’re knowledge factories feeding algos, analytics, compliance, valuation fashions, threat programs and macro methods. In an atmosphere of compressed spreads and low transaction charges, knowledge is essentially the most strategic — and worthwhile — asset FX venues personal.
The struggle behind the scenes in e-FX is not about buying and selling quantity. It’s about who controls the info that defines the market itself.
Readers can see extra of John McGrath’s articles on his Substack web page: